Friday, December 14, 2018

Return-Free Risk

by Ravo (writer), Sandy, Utah, December 02, 2012

Credit: Zcool
Graphic representation of a moving average

For the retail investor the road ahead in the stock market is full of potholes and danger lurks everywhere.

Most investors are familiar with the observation regarding the ‘Lost Decade’, a term that describes ten years of demonstrated zero returns on invested capital (on average) in the stock market. The term however, does not include the massive losses experienced in 2008 by retail investors who bought ‘high’ and were forced to sell ‘low’ as a result of a contracting economy and predatory practices by major banks, brokerages and miscellaneous financial institutions.

In my view, another buzz-word term, ‘The New Normal’ is an abstraction from the retreaded relationships that are developing between investors, market-makers, financial advisors, the U.S. Treasury, regulators, and so forth. The reality that is emerging is far more dire, and politicians and others in authority are relentless in their attempts to obscure the ‘facts’ of the world’s predicament at present. As an example, take the myth of Job Creation. The fact is, no one creates jobs, although a single person in high office can destroy them. Jobs are created as a result of economic demand for products and services by the populace. If people have money to spend, they are likely to spend it on things that they need first, and things that they want second. If they don’t have money, they can’t buy anything.

Consider this scenario: A government rep walked into a small business operation, and says to the owner,” We want to stimulate your business with this free money, but it must be spent on hiring more help, or expanding the market for your product.” So, the business owner takes the cash (paper money which is simply an I.O.U from the government), goes out and hires a few new people, dreams up things for them to do, and also increases advertising or adds new bells and whistles to the product to make it more attractive.

Unfortunately, people outside of the shop that are holding up signs that say, “Will work for food”, or are gathered in the park to protest the rich and famous while living on handouts or with their parents, aren’t going to spend anything with the freshly-funded small business. They can’t because they have no money. Soon the government/bank supplied money runs out and the business owner lays off the new workers and is right back where he/she started. This is the reality of supply/demand economics.

It takes years and years of blood, sweat, tears, and a lot of luck to grow an economy through increased consumption, but the world is now running out of consumable resources, and consumer-based economies are guaranteed to continue shrinking no matter what politicians and governments do. And in this scenario, a growing population is the worst thing you can have. It is pouring gasoline on the flames of environmental collapse, emerging disease pandemics, and total disruption of the earth’s food chain.

So think about this as you hear the hype and propaganda. The world must shrink the population down to where there are more resources than consumers of those resources in order to grow jobs and standards of living around the world. We are nearly seven billion people competing for a resource base that is only capable of sustainably supporting about two billon humans world-wide. So, where should you be invested to secure your future? I would offer that at present, cash is the safest place to be until there is better clarity. As it stands, return-free risk abounds. And, the risk will be amplified as more and more businesses contract or fail. Even real-estate is a risky asset. Governments faced with huge populations of the unemployed, will raid the assets of the wealthy, confiscate holdings of precious metals, and when that well runs dry, will burden landowners with higher and higher taxes. Where else will they get the money?

Now, the foregoing is not to suggest that there will be no opportunities at all. In my view, attractive investments will emerge in environmental remediation, geothermal energy, waste management, recycling, and so forth. Whether there are any retail investors left to take advantage of these opportunities is another matter entirely. It is wise to remember that there is no ‘Stock Market’, only a market for stocks, and this only exists when there is liquidity; that is, someone to buy the security being offered, and an accepted means of exchange to do so.

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